RBI policy review: Subbarao could have taken a calculated risk

October 30, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The Reserve Bank governor kept interest rates unchanged on Tuesday with a marginal 25 basis points decrease in cash reserve ratio (CRR), disappointing stock markets and  resulting in the Nifty going below 5640.

As in the past, Duvvuri Subbarao decided to play it by the book. He could be right in holding interest rates due to inflationary concerns. But the moot question is whether he has been able to control and bring down inflation, which is mainly due to supply-side economics, infrastructural bottlenecks and international commodity prices.

It was perhaps time the RBI governor took a cue from Fed Chairman Ben Bernanke, whom he met recently, to take the calculated risk of cutting the repo rate as this would have improved sentiment across the corporate world and markets, which is the need of the hour. Just as policy action by the UPA government, though yet to yield results, has played a huge role in improving sentiment. And sentiment could be a factor for economic revival.

Subbarao, who was in a position to push forward the government’s revival agenda, chose not to risk sticking his neck out and stuck to the well-trodden path.

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